TEXT-Fitch cuts San Benito CISD, Texas ULTs to 'A'
Sept 6 - Fitch Ratings has downgraded the following San Benito Consolidated Independent School District, TX's (San Benito CISD) bonds to 'A' from 'A+': --$62.7 million of unlimited tax (ULT) bonds, series 2004, 2005, 2005 refunding, and 2008. The Rating Outlook is revised to Negative from Stable. SECURITY The bonds are secured by an unlimited ad valorem tax pledge levied against all taxable property within San Benito CISD. The bonds are additionally secured by the Texas Permanent School Fund, whose bond guarantee program is rated 'AAA' by Fitch. KEY RATING DRIVERS BUDGET IMBALANCE EVIDENT: Continuing use of operating reserves to support recurring expenditures is the key rating driver supporting the downgrade and the Negative Outlook. State budget cuts, together with spending pressures and lack of meaningful budget adjustments, triggered over a 30% decline in fiscal 2012 reserves and an additional draw-down is budgeted in 2013. UNCONVENTIONAL TAX RATE STRUCTURE: The transfer of a portion of the tax rate from debt service to operations, while designed to yield maximum overall state funding, requires annual general fund subsidization of debt service and remains of concern to Fitch. The board retains the ability to raise the debt service tax rate as needed but this unconventional tax rate structure has remained unchanged since fiscal 2010. RELIANT ON STATE AID: The district is highly reliant upon state revenues to fund operations as a result of its low wealth per student and remains subject to an uncertain state funding environment. MIXED DEBT PROFILE: Debt ratios are above average as a percentage of the district's full market value (MV) and the pace of debt retirement is average. However, the aggregate fixed cost for debt, pensions, and other post-employment benefits (OPEB) is affordable. SUBPAR SOCIECONOMIC INDICES: The area economy is fairly diverse but, typical of many Texas border communities, suffers from chronically high unemployment, high poverty, and low wealth metrics. STABLE TAXPAYER BASE: Growth in taxable assessed value (TAV) has moderated in recent years after nearly doubling from 2001 to 2011. Fiscal 2013 TAV is essentially unchanged from the prior year. WHAT COULD TRIGGER A RATING ACTION DECLINE IN RESERVES: Inability to return to structural budget balance would apply downward pressure on the rating. CREDIT PROFILE STATE BUDGET CUTS HAVE TRIGGERED USE OF RESERVES FOR OPERATIONS The downgrade to 'A' primarily reflects the significant depletion of reserves in fiscal 2012 resulting from state budget cuts and lack of corresponding budget action by the district. The district used over one-third of its reserves ($5 million) to support operations in 2012, an amount roughly equal to the budgeted deficit. While the 2012 audit is not yet available, the draw-down would drop total general fund balance to about $9.5 million or 10% of spending compared to 18% of spending in fiscal 2010. The district achieved only marginal cost savings from an early resignation incentive program that was initiated to offset an estimated $5 million loss of state formula-funding, and also absorbed increased operating costs with the opening of a new elementary campus. The recently adopted fiscal 2013 $96.8 million operating budget again appropriates $1.9 million of reserves (20% of remaining reserves) to fund operating expenditures while leaving the tax rate unchanged. Flat state revenues and the loss of one-time federal funds prompted management to cut about $1 million from the budget by reducing campus police hours, shuttering a day-care center and laying off its five employees, holding 14 budget positions vacant, and limiting eligibility for the district's pre-kindergarten program. Nevertheless, the cuts were insufficient to bring the budget to balance and if budget projections materialize at year-end, fiscal 2013 operating reserves would drop to 8% of spending. Fitch notes the district's decision to draw on reserves to subsidize operations and lack of willingness to raise revenues as a credit concern. Fitch cautions that continuing use of reserves would be unsustainable, particularly given the uncertain state funding environment and limited resource base of the district, and would likely trigger further negative rating action. SWITCH OF OPERATING AND DEBT SERVICE TAX RATES REMAINS IN EFFECT The district does retain a degree of financial flexibility with a relatively low tax rate that could be raised with board approval. The total tax rate has remain unchanged since fiscal 2010 when the district executed a tax-rate swap, whereby voters approved a $0.13 increase to the operating tax rate, yielding maximum state aid for operations, while reducing the debt service tax rate by the same amount. The net effect of the swap was a level total tax rate and enhanced operating revenue, but an annual debt service fund shortfall of about $3.5 million that is subsidized by general fund resources. Fitch views the use of this tax rate structure with concern but notes the debt service tax rate can be raised as needed (without voter approval) - thereby easing pressure on the general fund - and the tax rate swap could be reversed, if necessary. MANAGEABLE LONG-TERM LIABILITIES Because state debt service aid is a function of wealth and local taxing effort, the reduction to the debt service tax rate also triggered a drop in direct state debt service aid - from 80% in fiscal 2010 to 45% in fiscal 2011. The gap is now being funded from a mix of the enhanced state and local operating revenues mentioned above. Overall debt is modest on a per capita basis at $1,599 but above average as a percentage of market value at 6.8%. The pace of amortization is average at 45% retired within 10 years and the annual carrying cost is affordable at 6.4% of general fund and debt expenditures. Officials have no plans to issue additional bonds in the near term. The district provides its employees with pension benefits through its participation in the Texas Retirement System of Texas (TRS), a cost sharing multiple-employer plan. The district's fiscal 2011 required contribution to TRS was $420,000, which represented a low 0.5% of fiscal 2011 general fund spending. The aggregate fixed-cost burden for debt, pension and OPEB was an affordable 7.2% of 2011 general fund and debt service expenditures. LIMITED BUT STABLE RESOURCE BASE This Rio Grande Valley district covers a 100 square mile area in Cameron County and serves the city of San Benito and certain unincorporated areas of the county. Estimated enrollment is just over 11,000 and enrollment growth has moderated from the 2% average annual gains seen from 2000-2010, in part due to competition from nearby charter schools. The area economy is based on agriculture, fishing, manufacturing, trade and tourism and also benefits from its trade links with Mexico; the City of San Benito (rated 'A+' by Fitch) is a commercial and tourist center for the surrounding region. Employment totals in Cameron County increased 7% from 2007 to 2011 and grew another 1.3% for the 12-month period ending June 2012, dropping the county's unemployment rate to a still high 11.4% from 12.5%. The area's high unemployment rate and low wealth indices are typical of most Texas border communities. The district's taxable base registered consistent growth in the past five years, and, while slowing during the economic downturn, averaged 3% annual gains from 2007-2012. Certified fiscal 2013 assessed values are essentially flat from 2012 at $838 million. Approximately half of the taxpayer base is residential properties and no single taxpayer accounts for more than 2.5% of total valuations. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors, and Texas Municipal Advisory Council. Applicable Criteria and Related Research: --'Tax-Supported Rating Criteria' (Aug. 14, 2012); --'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012). Applicable Criteria and Related Research: Tax-Supported Rating Criteria U.S. Local Government Tax-Supported Rating Criteria
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